Arbitration clauses are a common feature of commercial contracts. Arbitration offers the potential for expeditious and cost-effective dispute resolution.
Despite their popularity, arbitration clauses are not without controversy.
The Supreme Court of Canada's recent decision in Uber Technologies Inc v. Heller1 ("Heller") marks a new, broader approach for determining the potential unconscionability of arbitration agreements.
Background: David Heller had been an UberEATS delivery driver since 2016. He, like other UberEATS drivers, was required to accept a standard form services agreement. The contract contained an arbitration clause requiring disputes to be submitted first to mandatory mediation and, if unsuccessful, to arbitration in Amsterdam under the International Chamber of Commerce Rules of Arbitration and Dutch law.
In 2017, Heller commenced a proposed $400 million class action on behalf of Uber drivers in Ontario, alleging that they were employees of Uber and therefore entitled to certain benefits under Ontario's Employment Standards Act, 2000.2 Uber brought a pre-certification motion to have the proceeding stayed in favour of arbitration in the Netherlands. In response, Heller argued that the arbitration clause was invalid, unconscionable, and attempted to contract out of the mandatory provisions of the ESA.
Ordinarily, if a party challenges the validity of an arbitration clause, such challenge is referred to the arbitrators, based on the competence-competence principle, which dictates that arbitrators are competent to determine their own jurisdiction.
At the Supreme Court of Canada, Abella and Rowe JJ, writing for the majority in Heller, affirmed the Court's judgment in Dell Computer Corp v Union des consommateurs, holding that a court may depart from the general rule of arbitral referral where the jurisdictional challenge is based solely on a question of law or on a question of mixed law and fact that requires only superficial consideration of the documentary evidence.3
However, the Court also held that a bona fide challenge to the arbitrator's jurisdiction should not be referred to the arbitrators if there is a real prospect that doing so would result in the challenge never being resolved.4 For example, the validity of an arbitration agreement may never be decided if the claimant is unable to reach the physical location of the arbitration.
Recognizing that this broad exception may be open to abuse, the Court provided a two-step test for determining whether the jurisdictional challenge is bona fide:5
- Assuming the facts pleaded are true, is there a genuine challenge to arbitral jurisdiction?
- From the supporting evidence, is there a real prospect that the challenge may never be resolved by the arbitrator, if the stay is granted?
In this case, the Court concluded that both elements were satisfied, citing the US$14,500 up-front costs of commencing an arbitration under the ICC Rules. These fees represented most of Heller's annual income, and created a real prospect that the issue might never be resolved by the arbitrator. This rendered the clause void for unconscionability and created a genuine challenge to the arbitrator's jurisdiction.
The Court then considered the jurisdictional challenge on its merits. After reviewing the equitable origins of the doctrine, the majority confirmed that unconscionability requires proof of both (i) inequality of bargaining power and (ii) a resulting improvident bargain.6
The Court found that an inequality of bargaining power clearly existed between the parties. The arbitration clause was contained in a standard form agreement that Heller was unable to negotiate. There was a significant gulf in sophistication between Mr. Heller, a food deliveryman in Toronto, and Uber, a large multinational corporation. The clause also failed to provide any information about the costs of commencing the proceeding or any explanation of Dutch law. The bargain was also improvident because of the prohibitive costs of commencing the arbitration.
Having concluded that the arbitration clause was void for unconscionability, there was no need for the Court to decide whether Uber's services agreement was an impermissible attempt to contract out of the mandatory protections in the ESA.
The Takeaway: Dispute resolution clauses should be drafted with an eye to fairness. Following Heller, Canadian courts have much broader authority to scrutinize these agreements, particularly where one party can show that opting for arbitration "amounts to no dispute resolution mechanism at all."7
1 2020 SCC 16.
2 SO 2000, c 41 [ESA].
3 Dell Computer Corp v Union des consommateurs, 2007 SCC 34; See also Seidel v Telus Communications Inc, 2011 SCC 15.
4 Heller, at para 46.
5 Heller, at para 44.
6 Hunter Engineering Co v Syncrude Canada Ltd,  1 SCR 426; Norberg v Wynrib,  2 SCR 226; Douez v Facebook Inc, 2017 SCC 33.
7 Heller, at para 97.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.